FX: Cobalt fends off blockchain competition

By:
Paul Golden
Published on:

Despite the progress of other projects applying blockchain technology to FX, Cobalt’s CEO remains confident that his post-trade processing network can reach critical mass.

Cobalt was created with the objective of eliminating multiple licence fees, ticketing charges, IT overheads and staff costs for FX market participants by creating a single, shared view of a transaction, freeing up back- and middle-office resources that currently have to reconcile across multiple systems.

The venture’s backers – including Citigroup, First Derivatives and Digital Currency Group – are looking to capitalize on what they see as long-term underinvestment in post-trade services and take advantage of inefficiencies caused by legacy systems.

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Andy Coyne, Cobalt

Cobalt CEO and co-founder Andy Coyne explains that the beta version of the network has been operating since August 2016 and that the live platform will be rolled out later this year. 

“Unlike incumbent players in the FX post-trade space, we have no legacy technology to protect, so we have been able to work collaboratively with the industry to make cost-effective shared infrastructure a reality in a very short space of time,” he says.

More than 20 institutions have been signed up, including three of the top five FX trading banks in the world and two of the world’s largest non-bank FX trading firms: Citadel Securities and XTX Markets. Coyne says he expects that figure to increase before the platform goes live, likely in the third quarter of the year.

Signing up large electronic trading firms as well as banks were key steps in establishing the new venture’s credibility. The appeal of its proposition to non-bank FX trading firms is obvious: these firms face many of the same challenges as banks when it comes to post-trade processing.

Perhaps the most important element in attracting and retaining users is the ability to reduce costs. 

Coyne says his private peer-to-peer network reduces post-trade costs for financial institutions by up to 80%; he is convinced that these savings will make their way to customers rather than being swallowed up by banks and other traders keen to increase margins.

“By participating in a shared, efficient and resilient post-trade service, all market participants benefit,” he says. “The majority of the infrastructure burden currently falls to primary market operators, but all participants record their version of events separately and everyone has the associated reconciliation and processing burden. All costs are ultimately passed on, so it is in everybody’s interest for there to be a more efficient and inexpensive infrastructure.”

Blockchain competition

Others have identified the potential of blockchain to increase efficiency in the FX market. In May, NEX Optimisation revealed that it had built the underlying architecture for cloud-hosted, software-as-a-service (SaaS) platform NEX Infinity and that from this month, clients would be able to start testing spot FX in its distributed ledger. The company says that by bundling services, clients can meet all of their trade and portfolio processing needs throughout the transaction lifecycle in one place.

As well as reducing post-trade costs, the use of blockchain should make it easier to monitor trades that cause a lot of turmoil in the market, although this would depend on the ability of the service provider to get most if not all of the main market participants on board.

Coyne would not be drawn on how Cobalt would persuade those companies that are already using blockchain for processing FX trades to sign up to its service. However, he was more forthcoming on the value of the network’s partnership with financial blockchain specialist Setl.

“This was an important milestone as it is the first ledger we partnered with,” he says. “However, we have designed Cobalt to be ledger agnostic as we are conscious of the need to interact and operate with any ledger to maximise connectivity across the industry.”

The company has previously revealed plans to introduce additional services such as multilateral compression and payment netting. Coyne notes that many services can be derived from a single, reconciled version of a transaction that is completely immutable and adds that these services may not be provided directly by Cobalt.

“Our BlueSky platform allows third parties to access transaction data on the network and build applications that plug into this data,” he concludes. “This has proved very popular, and we are rapidly expanding our network of partners, having recently signed deals with LMRKTS and BestX.”